Managing Your College Loans

1. Before You Borrow.

Good debt management begins before you even take out a loan. When you go shopping for an education loan, consider:

The interest rate. Most education loans have a variable rate. See if the rate is indexed or linked to a published rate such as Treasury bills, and how often the rate changes. Find out what your total interest charges and total indebtedness will be. Some lenders may offer interest-rate reductions for prompt payment or electronic payment.

The origination fee. A fee to the lender. There may also be a guaranty fee, which goes to a guaranty agency for insuring the loan. These fees are deducted from the amount you borrow.

Interest capitalization. Check how often unpaid interest will be added to the loan principal if a borrower chooses to defer interest payments. Capitalization adds to the cost of the loan.

Grace period. Check whether the loan payments have to be made while the student is enrolled, and whether there is a grace period after graduation.

Lender service. Establish the quality of service your lender will provide, including electronic processing of loan applications and electronic transmission of funds, round-the-clock customer service and repayment counseling.

2. Paying It Back.

Be certain your lender offers flexible repayment options. Some borrowers want to repay their loans at the lowest cost; others need long-term relief because of high debt.

Here are examples of repayment plans available to borrowers whose loans are sold to the Student Loan Marketing Association, known as Sallie Mae, a company that buys and services education loans.

With a Standard Repayment Account, you make principal and interest payments each month throughout your loan term. You will pay the smallest amount of total interest.

Graduated Repayment Plans let you make reduced payments in the early years of repayment and still pay off your loans within the standard
10-year repayment term. Initial interest-only monthly payments can be
more than 40 percent lower than the payments you would make with Standard Repayment. But, because the principal is not paid as quickly as with Standard Repayment, you will pay more interest over the life of your loans.

Loan Consolidation gives you the lowest monthly payments for the longest period. Loan consolidation offers initial interest-only payments that can be more than 40 percent lower than Standard Repayment. The repayment term can be extended up to 30 years. With loan consolidation you can combine all your eligible loans into a single loan with a single monthly payment. A longer repayment term and lower payments will increase the total cost of your loan.

With Income Sensitive Repayment, payments are a percentage of your monthly gross income. You must reapply every year, and payments are adjusted annually to reflect any changes in income.

Prepayment. All federally sponsored loans allow you to prepay part or all of your obligation at any time during the life of the loan without penalty. Prepaying can greatly reduce the total cost of your loan.